HMOs Alive and Well in Orange County

n March 2003, a team of researchers visited Orange County to study that communitys
health system, how it is changing and the effects of those changes on consumers.
The Center for Studying Health System Change (HSC), as part of the Community
Tracking Study, interviewed more than 110 leaders in the health care market.
Orange County is one of 12 communities tracked by HSC every two years through
site visits and every three years through surveys. Individual community reports
are published for each round of site visits. The first three site visits to
Orange County, in 1996, 1998 and 2001, provided baseline and initial trend information
against which changes are tracked. The Orange County market encompasses an area
of about 30 cities south of Los Angeles.

Bucking a national retreat from tightly managed care, Orange County continues
to have extensive enrollment in health maintenance organizations (HMOs) that
delegate financial risk for patients care to large medical groups. After surviving
provider-network instability that threatened the market from 1996 to 2001, medical
groups have grown stronger financially with the cooperation of health plans.
Public insurance program expansions and grants from tobacco revenues have improved
access for low-income residents and strengthened the safety net, but severe
state budget woes threaten this progress.

Other important developments
include:

Health plans are exploring innovations in product design and quality
improvement, such as tiered-provider networks and financial incentives for
medical groups to improve quality.

Hospitals financial health has improved, but they now
face sharply rising operating costs and strained capacity.

Fast-rising HMO premiums and a sluggish economy have
led employers to shift more costs to workers and could
increase interest in insurance products that accommodate
more patient cost sharing, such as preferred provider
organizations (PPOs).

MO enrollment in Orange County remains strong, capturing more than 50 percent
of the private insurance market, as HMO premiums remain lower than those of
other options. Two years ago, many local observers expected less restrictive
insurance products to emerge, reflecting both the national trend away from tightly
managed products and the shaky financial footing of Orange County physician
organizations. Medical groups—ranging from the 900-physician Monarch independent
practice association (IPA) to Bristol Park Medical Group, now with fewer than
100 physicians—are central to the local delegated-HMO model in which health
plans largely delegate financial risk and care management activities to contracting
physician groups. A key feature of the delegated model is health plans
use of fixed per-member, per-month payments, or capitation, which since the
mid-1980s has encouraged medical groups to invest in the financial and care
management systems needed to manage risk.

In the late 1990s, flat payments from health plans—whose own premiums
were rising slowly—and the financial collapse of national, physician practice
management companies (PPMCs) threatened both the solvency of risk-bearing medical
groups and the delegated-HMO model, itself. Between 1998 and 2000, several PPMCs
declared bankruptcy, marking the end of a short-lived experiment that sought
to organize physicians into very large networks to streamline practice management
and negotiate with health plans. These failures disrupted patient care, threatened
the viability of physician practices owned by the PPMCs and encouraged new state
regulation of the finances of medical groups that accept risk from health plans.

The resurgence of HMO products in Orange County is due in large part to newfound
stability among risk-bearing medical groups, which was no accident. Recognizing
that the future of their HMO business depended on the medical groups, health
plans increased payment rates—as much as 10 percent annually in recent
years—and provided additional management support. Medical groups also
improved their financial positions by focusing on managing risk for physicians
fees and identifying and declining risk they believe is difficult to control—initially,
prescription drug costs and, more recently, infusion therapy and injectable
medications, including immunizations whose costs are unpredictable. In turn,
the recovery of most risk-bearing medical groups in Orange County has helped
to reduce contracting tensions between plans and physicians.

Continued support for delegating financial and care management responsibilities
to physician groups, along with low HMO premiums compared to other insurance
products, has slowed interest in and growth of PPOs. For example, both PacifiCare
and Health Net have developed PPO products, but local enrollment in them remains
low. Even Blue Cross of California, which dominates the California PPO market,
continues to see HMO growth in Orange County. And neither purchasers nor health
plans have shown much interest in consumer-driven benefit options, such as high-deductible
products.

The delegated-HMO model also has fostered innovations in the Orange County
market, such as increased use of hospitalists—general internists who specialize
in inpatient care—and health plan-medical group efforts to create payment
systems that reward better quality of care. Since they are at financial risk
for HMO patients, large Orange County medical groups have moved to employ or
contract with hospitalists, because they are potentially more efficient at providing
care to hospitalized patients. Hospitalists were largely unknown in Orange County
four years ago, but the rekindled commitment to physician risk contracting aligned
the financial incentives of medical groups with the skills of this new type
of medical specialist.More than half of the hospitalized patients in some plans
are under the care of hospitalists at any given time.

Working with physician groups, health plans have been exploring payment systems
to promote better medical care. PacifiCares Quality Index program is
a prototype of such a program, in which consumers receive data to compare medical
groups, and a groups ratings are based on customer satisfaction, quality
improvement indicators and adoption of certain information technologies. As
part of the Pay for Performance initiative of the California-based Integrated
Healthcare Association, plans and medical groups are collaborating on a uniform
set of measures that each health plan would use for incentive payments. Support
for this effort has been strong, and health plans contend they will put enough
money at risk to make the incentives meaningful. The payment systems are being
launched during 2003, with incentive payments, in the case of PacifiCare, beginning
as early as summer 2003.

he relative stability of the Orange County market also
reflects a strengthened hospital sector. Like physician groups, most hospitals
have obtained higher payment rates from health plans, but unlike physicians,
hospitals have mostly shed risk contracts, except where they are clearly advantageous,
such as in some Medicare+Choice plans. In contrast to medical groups, hospitals
have not viewed population health management as a core competency and, therefore,
have never developed the necessary skills or systems. This divergence between
physicians and hospitals was evident in the September 2001 ending of an affiliation
between Bristol Park Medical Group and St. Joseph Health System. Among other
management and organizational differences, the medical group wanted the hospital
system to aggressively capture capitated lives, but, instead, the hospital system
cut back on risk contracts.

The interests of physician specialists and hospitals do appear to be converging,
however, especially in promoting specialized services. These services, such
as outpatient surgery, are easier to develop and sustain with fee-for-service
payments rather than capitated payments controlled by primary care-dominated
medical groups and IPAs. Although some specialists have shown interest in developing
their own ambulatory surgical facilities, hospitals mostly have succeeded in
gaining specialists support for developing or expanding hospital-owned
programs targeting special patient populations, such as those with cancer and
womens health issues.

Hospitals ability to exit risk contracts and obtain more favorable payment
rates comes in part from higher occupancy rates and the greater contracting
leverage those bring. Also, unlike a few years ago, most hospitals are negotiating
as multihospital systems that serve many parts of the county. Because health
plans need broad geographic access for their enrollees, this strategy helps
all hospitals within such systems to gain negotiating leverage. Hospitals no
longer think they have to accept what they view as inadequate payment rates
from health plans, and health plans, having obtained higher premiums, are willing
in most cases to increase hospital payments to maintain network stability and
access. This accommodation is a legacy of the St. Joseph system decision to
terminate its HMO contract with PacifiCare in 2001. St. Joseph was able to retain
most, but not all, of its patients as they switched enrollment from PacifiCare
to other health plans, which sent a powerful message to both sides about the
consequences of contract showdowns.

With health plan relations on a more even keel, hospitals have turned to a number
of daunting operational challenges. Capacity constraints brought on by both
a lack of available beds and an ongoing nursing shortage have hit most Orange
County hospitals, especially in the affluent southern and Newport Beach areas.
Diversion of patients from emergency departments is a common occurrence, and
scheduling elective surgery can reportedly entail lengthy delays in some cases.
In response, hospitals have embarked on major construction projects. For example,
Tenets Fountain Valley Regional Medical Center is spending $76 million
on a 156-bed patient tower, while the University of California-Irvine (UCI)
Medical Center plans to construct a $370 million replacement hospital that will
increase its bed capacity from 383 to 407. Californias seismic retrofitting
standards, with deadlines in 2013 and 2030, also are driving large capital investments.

Orange County hospitals, like those in many other parts of the country, have
faced a shortage of nurses for at least three years. Competition for nurses
among hospitals has been fierce, with reports of signing bonuses and car allowances
not uncommon. One hospital system reported staff nurse salaries approaching
$80,000. The effects of the nursing shortage may be aggravated by a state-mandated
nurse-staffing ratio of six patients to one nurse that takes effect Jan.1, 2004.

MO premiums in Orange County have
increased at percentage rates in the mid-teens,
a rate of growth that some purchasers
reported is higher than for PPOs. Fast-rising
premiums are the price of the network
stability achieved in this market by funding
higher provider payments. In most other
markets, rising premiums, combined with
a sluggish economy, have led employers to
seek lower-cost insurance products than
HMOs with their comprehensive benefits
and low cost-sharing provisions. Although
this shift has not occurred in Orange County,
health plans anticipate that HMO price
increases eventually will drive purchasers
to seek alternative designs. As a result, and
despite a lack of employer interest, plans
continue to develop PPOs, which offer more
flexibility than HMOs to reduce purchaser
outlays by increasing patient cost sharing.
Even Kaiser Foundation Health Plan, whose
stock-in-trade has been a comprehensive
benefit and strictly limited provider network,
is exploring the feasibility of launching
such an alternative product.

In the meantime, health plans also have experimented with new provider network
designs that can be used in their HMOs. Three of the areas six largest health
plans have launched some variation of tiered-networks—another plan has
done so for a PPO—in which consumers pay more out of pocket to see higher-cost
providers in the plans networks. For example, Blue Shield of California classified
contracted hospitals as either choice (preferred) or affiliated (nonpreferred)
based on prices, with enrollees facing higher copayments if they choose nonpreferred
hospitals—$100 to $300 more per hospital day for HMO enrollees and about
10 percent higher coinsurance for PPO enrollees. The plans approach is partially
an attempt to gain leverage to counter hospitals demands for higher payment
rates. Hospitals initially resisted tiered networks when hospital prices were
the exclusive basis of the tiers; in response, Blue Shield has now incorporated
14 quality measures into its tiering criteria and will take into account the
illness severity of a hospitals patient population. Other plans are considering
similar approaches. The effect of tiered networks on providers and consumers
remains to be seen, as plans are approaching this innovation cautiously. For
example, at this point, Blue Shield includes all Orange County hospitals in
its preferred choice tier.

The public sector is innovating as well in response to cost and revenue challenges.
In particular, the Medi-Cal managed care program in Orange County is aggressively
pursuing care management strategies targeting both high-cost patients and high-cost
providers (see box on page 5).

hrough 2002, the health care safety net in
Orange County modestly improved access
to primary care due to an infusion of new
funding and eligibility and enrollment
expansions in Medi-Cal and Healthy
Families, the State Childrens Health
Insurance Program (SCHIP). The new
funding helped to bolster overall community
clinic capacity and expand specific services;
however, advocates expressed growing
concern that access would erode as the
state faced large budget deficits and the
economy continued to sputter.

Between 2000 and 2002, California
aggressively expanded enrollment in
Medi-Cal and Healthy Families. The state
paid application assisters $50 per new
application, and CalOPTIMA coordinated
many outreach initiatives through subcontracts
with local organizations. The state also
expanded eligibility for some low-income
residents—for example, earmarking $52
million from the states tobacco settlement to
expand Healthy Families eligibility in 2001
from 201 percent to 250 percent of the federal
poverty level. At the same time, Orange
County voters dedicated considerable new
tobacco settlement and tobacco tax revenues
to the safety net, especially community clinics
and emergency department care. During
2001-02, the areas 19 community clinics used
about $3.6 million in new funding to expand
days and hours of service, helping to increase
the number of people served by the clinics
from 110,000 to 130,000. Dental care was
targeted specifically. For example,Huntington
Beach Community Clinic opened a six-chair
dental care center in August 2002, and
Laguna Beach Community Clinic started a
new five-day-a-week dental program with two
chairs and was studying the feasibility of a
mobile dental van. Although some of the
new funding has helped to build ties across
safety net providers, the expectation of
some safety net advocates in 2001 that this
new funding would greatly strengthen and
coalesce the safety net system—by creating
strong linkages among organizations—has
not yet been realized.

Progress in access and the safety net was
threatened by state and local developments
in early 2003.Most important, California was
grappling with an 18-month state budget
shortfall of about $35 billion. Gov. Gray
Davis initially proposed $21 billion in budget
cuts, including a 29 percent cut to Medi-Cal
that would have meant a loss of coverage
for about 40,000 Medi-Cal beneficiaries in
Orange County, according to one estimate.
The governor also sought to cut physician
and hospital payment rates by 15 percent,
eliminate some optional Medi-Cal benefits
and delay expansion of Healthy Families
coverage to parents, but he proposed
maintaining current coverage expansions for
children. Faced with bipartisan opposition
from lawmakers, Davis released a new budget
proposal in May 2003 that cut fewer health
programs, but even that version ran into
resistance. In June, Congress passed federal
tax cut legislation allocating $20 billion to
states, and California Democrats have proposed
using the states approximately $2.4
billion share to fund health care programs
previously slated for cuts. Nonetheless, local
advocates fear the states budget woes will
erase recent gains, especially in community
clinic capacity. As of mid-July 2003, the state
Legislature had not yet passed a fiscal year
2004 budget.

A second threat to access involved the
county-run Medical Services for the Indigent
(MSI) program, which pays for inpatient
care for uninsured adult county residents.
In late 2002, UCI Medical Center, the areas
main safety net hospital, instituted a policy
to limit MSI care only to patients who live
within five miles of the hospital; nonarea
patients were to be referred to clinics closer
to their residences. UCI also threatened to
end its contract with the county program
unless the burden of care was spread more
evenly among area hospitals. In response,
the Orange County Board of Supervisors
restructured the MSI program, adding
prior authorization for hospital stays as
well as a case management component to
refer patients to appropriate care through
contracts with groups of hospitalists and
specialists. The county also increased the
annual MSI allocation to $47 million by
adding $2 million to cover prescription
drug costs.

he Orange County health care market has
stabilized over the past two years. Insured
local residents have benefited as contract
negotiations between health plans and
providers, though still contentious, no
longer threaten to unravel provider networks
and disrupt patient care. In addition, the
easing of tensions has allowed plans and
providers to explore care delivery innovations
that could benefit patients by
providing incentives to improve quality.
Health plans and large medical groups
have renewed their mutual interest in the
markets tightly managed HMO model
and have worked together to strengthen
the medical groups financial health. On
the other hand, hospitals and specialists
have moved away from the capitation
environment, finding shared interests in
nonrisk relationships with health plans
and each other.

In the next few years, the following
issues facing this market will be important
to track:

Will the state make significant cuts in
Medi-Cal and Healthy Families, and, if so,
will such cuts reduce access and undermine
the financial viability of provider organizations,
not just those in the safety net?

Will hospitals be able to comply with
state-mandated nursing ratios, and with
what effect on hospital capacity, patient
care and financial bottom lines?

Will rising premiums spark local purchaser
interest in tiered networks such as PPOs
or other more flexible product options?

How will changes in the countys Medical
Services for the Indigent program affect
access to inpatient and specialty services
for uninsured individuals?

CalOPTIMA, the quasi-governmental agency that manages the Medi-Cal managed care
program in Orange County, has established itself as a leader in promoting public sector
coverage and access while developing creative strategies to control the use and costs of
services. The agencys efforts to coordinate outreach efforts were noted as an important
reason why the number of Medi-Cal enrollees in Orange County increased from 271,000
in April 2001 to 302,000 in January 2002. But like many payers, CalOPTIMA also has
focused considerable energy on slowing steeply rising costs by, for example:

The agency has ventured into innovative care management areas as well, such as a
wheelchair-fitting clinic, using a physiologist to ensure appropriate matching of patient
to chair.

By and large, CalOPTIMAs aggressive strategies have garnered praise throughout the
local market. However, some health plans viewed some requirements as onerous, and
Blue Cross of California decided to withdraw from CalOPTIMA, which required about
30,000 Medi-Cal beneficiaries to enroll in a new plan. Though not perceived as a major
threat to the program, this change represented the loss of a highly visible, mainstream
health plan.

Note: If a person reported both an unmet need and delayed care, that
person is counted as having an unmet need only. Based on follow-up questions
asking for reasons for unmet needs or delayed care, data include only responses
where at least one of the reasons was related to the health care system.
Responses related only to personal reasons were not considered as unmet
need or delayed care.

The Community Tracking Study, the major effort of the Center for Studying Health System
Change (HSC), tracks changes in the health system in 60 sites that are representative of the
nation. HSC conducts surveys in all 60 communities every three years and site visits in 12
communities every two years. This Community Report series documents the findings from the
fourth round of site visits. Analyses based on site visit and survey data from the Community
Tracking Study are published by HSC in Issue Briefs, Tracking Reports, Data Bulletins and
peer-reviewed journals. These publications are available at www.hschange.org.